Four shareholders form a new corporation in exchange for stock with a fair market value of $1,000 per share.Benjamin transfers investment land (current fair market value of $35,000) that he purchased 10 year ago for $15,000.In exchange, Benjamin receives 30 shares of stock and $5,000 cash.Andrew transfers a machine with a basis of $45,000 and a fair market value of $35,000.Andrew receives 30 shares of stock and $5,000 cash.Emily transfers a rental office building (current fair market value of $45,000) that she purchased 20 years ago for $60,000.Its current basis is $15,000 after recognition of $45,000 in depreciation expense.The corporation assumes the $20,000 balance on the original mortgage and Emily receives 25 shares of stock from the corporation in the exchange.Jackson provided the legal services to organize the corporation (value $5,000) and contributes $10,000 in cash in exchange for 15 shares of stock.How much gain does Emily recognize?
A)0
B)$5,000
C)$15,000
D)$20,000

Question

Quizplus · Accepted Answer

Emily recognizes a gain of $5,000 because she receives $5,000 in cash, which is considered boot in the exchange. The gain recognized is the lesser of the boot received or the realized gain.

Four Shareholders Form a New Corporation in Exchange for Stock